How Supply Chain Issues Impact Multifamily Real Estate Investments

By The ArborCrowd Team
Jul 29, 2022

Beginning in 2020, the COVID-19 pandemic disrupted global supply chains, leading to a shortage of products across various industries.

Prices for goods increased quickly and quite dramatically when consumer demand started to pick up in 2021 as the U.S. economy recovered. Supply chains were further squeezed in the first half of 2022 by a confluence of factors, including:

The supply challenges have been one of the primary contributing factors to rising inflation, which is affecting worldwide financial markets. The U.S. inflation rate rose to 9.1% in June, the highest since 1981. The multifamily real estate market has been affected by material shortages, construction delays, and higher prices, but there could be a light at the end of the tunnel.

Multifamily Real Estate Supply Chains Disrupted

When the pandemic began in the United States, lockdowns to limit its spread affected the production of critical supplies and caused delays in multifamily development across the country. Some local governments, such as New York State, even paused “nonessential” construction projects, which included new market-rate housing. (Affordable housing construction was deemed essential in New York, but even some of those projects were halted by sponsors due to worker safety concerns.)

The development pause and production slowdown of supplies led to a decrease in multifamily unit deliveries, which was exacerbated by heightened demand for multifamily properties. While offices, hotels, retail spaces, education facilities, entertainment venues and more were forced to close, the multifamily sector gained tenant demand as people stayed home to practice social distancing and work remotely. Additionally, the Federal Reserve reduced borrowing costs to historic lows and government agencies Freddie Mac and Fannie Mae continued to support the multifamily industry with financing while liquidity dried up for other asset classes.

The high investor demand for multifamily assets continued into 2021 as foreign investors returned when travel restrictions were reduced. However, the supply shortages continued to put pressure on development. The pandemic limited production at sawmills, resulting in a shortage of lumber for projects, which eventually pushed prices to record highs in May 2021, as demand increased.

Lumber was far from the only material affected. Lead times to acquire many building materials have increased dramatically and still continue to be elevated. For example, roofing insulation is taking 40 – 50 weeks for delivery, a 667% increase from 2020, according to a CBRE report based on data from contracting firms from April – May 2022. Lead times for HVAC equipment is 36 – 50 weeks, a 250% increase, while electrical panels (30 – 40 weeks) and appliances (20 – 30 weeks) have lead times that increased more than 400% from 2020.

Along with lead times to receive supplies, prices to build are also much higher this year. Building material costs increased 20.4% year-over-year, according to the National Association of Home Builders. Overall construction costs are expected to rise 14.1% year-over-year by the end of 2022, according to CBRE. The high cost of labor due to a shortage of workers and inflation is also a major contributing factor to rising construction costs.

The supply issues and high demand for housing have also inflated prices significantly in the for-sale single-family housing market, pushing some would-be homebuyers into the rental market. Furthermore, rising mortgage rates have further pushed homeownership out of reach for many, resulting in a boost for single-family rental and build-to-rent units.

The Light at the End of the Tunnel

While issues with the supply chain and high prices still remain, there are early signs that market forces are shifting. Fuel prices are falling — decreasing prices to transport goods — and lumber prices have collapsed more than 50% from its peak in March. China also began easing it’s COVID-19 lockdowns in late June, which should lead to an uptick in manufactured goods. CBRE expects construction prices to stabilize near historical averages of 2% – 4% in 2023 and 2024.

It’s important to remember that financial markets are cyclical, and demand and supply fundamentals often change positions. The supply chain issues, which were a result of the pandemic and geopolitical turmoil, have impacted the multifamily market for the past two years but a shift maybe on the horizon.